The Financial Stability Board, Federal Reserve System, along with the Biden Administration recently expressed their worries on ‘stablecoins,’ suggesting the risk that these unique cryptocurrencies could pose to the global financial stability. Global financial regulation authorities now have a rendezvous with yet another enemy after bitcoin and Facebook’s digital currency, Libra. It was specifically these cryptocurrencies that the Financial Stability Board (FSB) targeted in its report ‘The dangers of that crypto asset’ which was published on 16 February, 2022. FSB, the global organization created by the G20 in the year 2009 wrote, “Despite concerns about regulatory compliance, the quality and adequacy of reserve assets, and standards for risk management and governance,” stablecoins continued their growth throughout 2021. The currency is therefore, set to jeopardize global financial stability.
According to Nathalie Johnson,
economist and specialist at Neoma Business School, told FRANCE 24, that this apprehensive take on stablecoin seems surprising for a digital currency that was originally created intending to “put the brakes on the volatility of Bitcoin and to rightly bring a bit of stability into this sphere.” Stablecoins, as their name suggests, are those cryptocurrencies, for which, we can say that the prices never really fluctuate. This is because stablecoins are indexed using a base reference like the US dollar. Let’s take Tether- the widely-used and most famous of all, which almost always has a value equal to that of one US dollar. It is this promise of stability that creates “the bridge between paper currencies (dollar, euro, yuan, rupees etc.) and cryptocurrencies,” Vincent Boy, cryptocurrency expert and financial analyst with the consulting firm IG, expressed to FRANCE 24.
Essentially, Stablecoins investors
in cryptocurrencies tend to avoid fluctuation in prices by exchanging their currencies into various types of stablecoins in order to know the exact dollar value of their portfolio. Also, to guarantee their value, creators of “stable” crypto should keep the same amount of dollars in reserve (for example- $78.2 million USD) as the number of stablecoins (78 million coins) in circulation.
The value increase for Tethers specifically has caused
enough concerns to financial authorities all over the world to send them in a wave of shock and distress. This growing stature of stablecoins is one of the significant indicators of “democratization of investments in cryptocurrency,” said Boy. This means that the more the people want to exchange dollars for crypto, the more the volume of transactions increases and the more stablecoins there are in circulation. FSB also commented on the evident nature of stablecoins’ “increasing interconnectedness with the traditional financial system”. This meant that any kind of failure in stablecoins will lead to financial losses for both investors and the traditional financial markets. Boy commented on it, saying “The financial influence stablecoins have is significant, but the central banks have the capacity to cover losses if there is a problem without hurting their balance sheets too much.” But if continue to show the same growth, they could “reach a systematic size, meaning they have become ‘too big to fail’”, added Boy. Calls have been made from the FSB and the Federal Reserve to regulate stablecoins and to place them under obligations similar to that of banks. US President Joe Biden pressed for tighter controls.